Real Estate Short Sales
We all know that defaulting on mortgage payments puts the borrower in a difficult situation. Many people do not realize the options that they have available before the house is confiscated by the bank. Short sale is an alternative path to take in order to avoid foreclosure and aid in gaining time and protection, as long as it is done properly by qualified and licensed advisor or an attorney.
Short Sale or Short Pay is when the lender agrees to accept a sales price of fair market value for your property despite the loan (or loans) totaling more than what the property is worth.
By agreeing to a short sale or short pay, the lender agrees to take a loss on the property and write off the difference between what was originally owed on the property and the final real estate short sales price.
In many cases, this means that lender is ending up with less than what is owed on the property to fully satisfy the loan.
Why would a consumer/borrower want to do a Short Sale?
Short sales stop mortgage foreclosure and prevent the lender from suing for deficiency, thus being a huge benefit to the consumer. Deficiency is the difference between what the lender would have received under the contract and what the property finally sells for. This shortfall can often be more than $100,000.
Short sales allow you to enter into a voluntary agreement with the lender. This agreement stops the foreclosure process and therefore, your credit report does not merit a FORECLOSURE entry. Not only does this put you in a much better position to purchase another property in the future, but it also provides peace of mind.
Through our negotiation process, the lender agrees to forego suing you for any monies which they write off associated with the Short Sale transaction.
A Short Sale transaction also takes away much of the guess work. You will know exactly when the sale will close and when you will need to vacate the property.
How important is it to have a knowledgeable professional?
During the intense negotiation of a Short Sale, the lender will require certain specific documents and information. Too much information or documents in the wrong format could entirely destroy a Short Sale transaction.
The lender will require documentation demonstrating property value and verification of such value with a broker’s price opinion (BPO).
In addition, the lender will ask for financial information about the borrower. It will then be crucial for the borrower to convince the bank that he/she is in financial hardship and is unable to make future payments. Accurate bank statement and tax returns are essential to painting a grim picture of the borrower’s financial circumstances.
This stage is the most sensitive of all. The borrower must show that when they applied for the loan and “proved” to the lender that they DID have the income to make the payments, they do not NOW have the income to make the payments.
Proving your hardship
The borrower must prove to their lenders that they in fact have a hardship which limits them from making future loan payments. A hardship letter must be carefully dictated by the borrower to show cause to lender.
A miscommunication at this point in the transaction could imply mortgage fraud; for this reason, it is critical to be properly represented by a qualified advisor or attorneys who will effectively take you through the process.
What are the tax implications of a Short Sale?
Even though the tax situation of individual borrowers will vary, in general, a lender files a 1099C information with the IRS if the amount of discharged indebtedness is $600.00 or more, pursuant to IRS regulations applicable to discharge of indebtedness.
Often, critics of Short Sales look only at the 1099 income without considering the benefit of the offsetting deduction for the loss on the property.
The bottom line on taxes is that the tax year in which the borrower completes the Short Sale is a complicated one, and it is critical to have a Certified Public Accountant prepare taxes for that year. It is easy to miss the deduction. Do not let it happen to you.
Experts at your side
Barsam & Associates can assist you with confidence in the negotiations of your Short Sale transactions with large financial institutions. It is always our recommendation that homeowners seek legal advice from an attorney and tax advice from a qualified CPA to insure they understand the ramification of a short sale transaction.
Despite our ability to reach favorable settlements with lenders, unfortunately, we can not guarantee the outcome of a short sale transactions as each case is different and results do vary.
For further information, please contact us at 877-522-7726 or email us at firstname.lastname@example.org.